Tuesday, November 23, 2004
Macroeconomics 101: The 3 Elephants in the Room
This Kuro5hin essay lays it out very clearly and simply. There are three elephants in the room we call the U.S. Economy that U.S. politicians of all stripes are not talking about, Debt, the Dollar and the Rise of India & China. Then there's the possibility that the elephants might get up and dance with each other:
Increasing strength in the Chinese and Indian economies, providing goods and services to consumption-oriented Americans willing to go into personal debt to maintain their standard of living, could easily lead to a widening of the US current account deficit. If the current account deficit grows too large it could easily trigger significant depreciation of the US Dollar. Should the US Dollar start too look too volatile, or become a significant financial risk to hold (due to depreciation), global markets could easily start to embrace the far more stable Euro, potentially sending the US Dollar into free fall. During a period of such extreme uncertainty in the US Dollar, foreign investors may well seek to diversify their investments away from the US towards rapidly growing countries such as India or China. That is to say, any one of these issues could trigger the others, to a devastating end.Lots of good comments, too.
Comments:
Hi David, the one thing that the article misses out on is the multiplier effect of the services being sold by their companies.
As more of the work comes their way, more of the money stays in India or China. That money goes to increase the net domestic demand for all products and services. Unlike most aid programs, which are very often side-door subsidies to the businesses of the donor country, this stuff grows the local economies.
At some point the domestic demand in India and China will start to balance the export demand and the dynamic changes dramatically.
I'd also be interested to see what the India-China cross trade is like. When 2 massive markets that live next door start to trade in earnest there will be one of two outcomes; they go to war for the business, or they mesh into a trading block.
Hindi has a word for that, Juggernaut.
As more of the work comes their way, more of the money stays in India or China. That money goes to increase the net domestic demand for all products and services. Unlike most aid programs, which are very often side-door subsidies to the businesses of the donor country, this stuff grows the local economies.
At some point the domestic demand in India and China will start to balance the export demand and the dynamic changes dramatically.
I'd also be interested to see what the India-China cross trade is like. When 2 massive markets that live next door start to trade in earnest there will be one of two outcomes; they go to war for the business, or they mesh into a trading block.
Hindi has a word for that, Juggernaut.
"SHANGHAI -- The long lunch-hour lines at this city's downtown Bank of China are filled with people who not long ago stuffed their accounts with U.S.
currency. Now they are dumping dollars.
Yuan Man, ticket No. 252 in line, has set aside more than $50,000 to support his son's dream to study in the U.S., but regrets not holding a stronger euro, or even a firm yen. Ron Chen, an Australian pharmaceutical executive, is paid monthly in dollars and converts each paycheck immediately into yuan . A middle-aged woman and her elderly mother sit nearby awaiting the arrival of an overseas wire transfer. They, too, plan to get rid of their dollars the same day.
"The dollar doesn't mean anything anymore," says the woman.
From black marketers to anxious grandmothers, Chinese have become disenchanted with the dollar. The selling has posed problems for Beijing as it tries to keep the yuan pegged to the dollar, adding to pressure China is getting from its trading partners to revalue its currency.
The selling also signals a startling shift that may have damaging implications for the dollar down the line: Many Chinese view the yuan , also called the renminbi, as the safer currency to hold.
"The U.S. dollar is weakening! The renminbi is the hard currency now!"
shouts a 40-year old man after pulling $10,000 out of U.S.-dollar-denominated stocks and plunking the sum into yuan deposits.
"It's the best choice," he says."
"This kind of fight between the eater and the eaten never goes so far that the predator causes extinction of the prey: a state of equilibrium is always established between them, endurable by both species.
What directly threatens the existence of an animal species is never the "eating enemy" but the competitors."
The lack of "prey" would be the lack of food and would mean subsequently the death warranty of the "predator".
Admitting the forwarded scenario, the Chinese would abandon the dollar, this would create a very strong alternative currency (let's think the Euro).
But this would sign their death warranty.
The Chinese more than the rest of the world rely their successful economy on exports, when the dollar will be too weak and the Americans too poor, when the Euro will be too strong and the European economy at the bottom: Where will they export?
What directly threatens the existence of an animal species is never the "eating enemy".
The Chinese know (or should know) too well the next scenario.
Patrizia from a World on IP
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currency. Now they are dumping dollars.
Yuan Man, ticket No. 252 in line, has set aside more than $50,000 to support his son's dream to study in the U.S., but regrets not holding a stronger euro, or even a firm yen. Ron Chen, an Australian pharmaceutical executive, is paid monthly in dollars and converts each paycheck immediately into yuan . A middle-aged woman and her elderly mother sit nearby awaiting the arrival of an overseas wire transfer. They, too, plan to get rid of their dollars the same day.
"The dollar doesn't mean anything anymore," says the woman.
From black marketers to anxious grandmothers, Chinese have become disenchanted with the dollar. The selling has posed problems for Beijing as it tries to keep the yuan pegged to the dollar, adding to pressure China is getting from its trading partners to revalue its currency.
The selling also signals a startling shift that may have damaging implications for the dollar down the line: Many Chinese view the yuan , also called the renminbi, as the safer currency to hold.
"The U.S. dollar is weakening! The renminbi is the hard currency now!"
shouts a 40-year old man after pulling $10,000 out of U.S.-dollar-denominated stocks and plunking the sum into yuan deposits.
"It's the best choice," he says."
"This kind of fight between the eater and the eaten never goes so far that the predator causes extinction of the prey: a state of equilibrium is always established between them, endurable by both species.
What directly threatens the existence of an animal species is never the "eating enemy" but the competitors."
The lack of "prey" would be the lack of food and would mean subsequently the death warranty of the "predator".
Admitting the forwarded scenario, the Chinese would abandon the dollar, this would create a very strong alternative currency (let's think the Euro).
But this would sign their death warranty.
The Chinese more than the rest of the world rely their successful economy on exports, when the dollar will be too weak and the Americans too poor, when the Euro will be too strong and the European economy at the bottom: Where will they export?
What directly threatens the existence of an animal species is never the "eating enemy".
The Chinese know (or should know) too well the next scenario.
Patrizia from a World on IP
